Fed to trim quantitative easing: survey

NEXT STEPS:Debate among policymakers over when and how to dial back the easing campaign has hit financial markets, with the S&P 500 having dropped 2.8% since May

Bloomberg

Economists cut their estimates for how much the US Federal Reserve will reduce the amount of its monthly asset purchases, a Bloomberg survey shows.

Policymakers led by Federal Reserve Chairman Ben Bernanke will trim their so-called quantitative easing program to US$65 billion a month at the meeting of the Federal Open Market Committee (FOMC) on Oct. 29 and Oct. 30, from the current level of US$85 billion, according to the median estimate in the survey of 59 economists this week.

In a similar survey before the Fed’s meeting on April 30 and May 1, economists predicted the first move in the fourth quarter.

Debate among central bank policymakers over when and how to dial back their unprecedented easing campaign has shaken financial markets.

The Standard & Poor’s (S&P) 500 Index has dropped 2.8 percent since reaching a record closing high on May 21, and the yield on 10-year US Treasuries has risen to 2.08 percent from as low as 1.63 percent last month as investors weighed the timing of a reduction in the central bank’s stimulus.

“Even those who are advocating for tapering are thinking that it could be a pretty small first step to see how it goes,” said Julia Coronado, chief economist for North America at BNP Paribas in New York and a former Fed economist. “That’s one of the few things we’ve learned” from the debate among policymakers.

When the first move comes, officials will split their US$65 billion in purchases between US$30 billion a month of mortgage bonds and US$35 billion a month of Treasuries, a US$10 billion reduction in each category, according to the survey, conducted on Tuesday and Wednesday.

In the previous survey, economists expected the tapering to be larger, with the Fed cutting purchases to US$50 billion from US$85 billion in its first step down.

Two of the 59 economists surveyed this week expect the pace of purchases to be reduced at the FOMC meetings on June 18 and June 19 or on July 30 and 31.

Sixteen say tapering will begin at the meeting on Sept. 17 and Sept, 18, 14 see it happening on Oct. 29 and Oct. 30 and 15 forecast the first tapering on Dec. 17 and Dec. 18. Twelve see tapering next year or later.

“If jobs growth continues in the 150,000-to-200,000 per month range, that’s probably sufficient to lower the unemployment rate slightly,” said Tom Lam, chief economist at DMG & Partners Securities in Singapore. “Coupled with real GDP growth recovering to 2.5 percent, that would be sufficient for them to consider tapering modestly at the December meeting.”

Philadelphia Fed President Charles Plosser has called for tapering to start as early as the central bank’s next meeting.

Federal Reserve Bank of New York President William Dudley said in an interview last month that he would like to wait three or four months to see “how the tug-of-war between the fiscal drag and the improving economy are going to sort of work their way out.”

St Louis Fed President James Bullard said on May 23 in London that more disinflation could prompt additional asset purchases by the central bank, and Boston’s Eric Rosengren said the Fed should increase purchases if the incoming data “do not reflect improvements” in unemployment and inflation.

Policymakers will have a clearer view of the employment picture after yesterday’s monthly jobs report from the US Labor Department. Economists in a separate Bloomberg survey expect the report to show that employers added 163,000 jobs last month.